Key trends in the chemicals industry in the year 2017 and beyond

The headwinds in the chemicals industry are blowing with the force of a gale in an uncertain global economy. Within this uncertain macroeconomic environment compounded by the strong dollar, the global demand for chemicals has markedly fallen. The industry sales growth was in low single digits last year as the sector faced broad inventory control and declining industrial production by a number of major customers. Chemical companies selling petroleum products fell even shorter of the industry average because lower oil prices impacted their top lines massively. The only beneficiaries were naphtha-based producers as their cost reduced by as much as 60% in case of some companies, enormously improving their bottom lines.

The overall industry outlook for the year 2017 and beyond is to expect the same or even a worsening situation for those organisations unwilling to make hard decisions addressing high uncertainty in their major markets. The uncertain environment of the past few years is slowly seeming like the new normal for the chemicals industry. The industry is being shaped by hyper-competition where companies must slog it out for profitable growth in large markets, each of which has its own significant shortcomings and offers little by way of support. The situation increasingly seems like a zero-sum game and the coming years will prove critical in determining market share for many of the established chemical companies. To emerge as the last man standing in this inevitable bloodbath, three key strategies should be prioritised –

Value over volume – Chemical companies can no longer rely on volumes to drive their growth, except for a few exceptions. A focus on recycling and overall weakness in key markets will impact sales and drive down demand. Some potential growth areas exist with new materials such as biopolymers, but they are a long way from attaining economies of scale. With demand at a premium, companies need to extract maximum possible value from other operational parts to improve overall performance. A few ways to do this include revamping customer offerings such as offering differentiated services with a fee structure that is tiered or implementing sales training to improve sales personnel efficiency. One approach almost always overlooked by companies could have the greatest impact in short-term value benefits. It is pricing excellence i.e. the ability to raise base prices on a logical connection to sales and production costs and then being able to monitor and adjust prices depending on the results achieved. While pricing excellence is not easy or an insignificant undertaking, it can improve profitability by leaps and bounds.

Next generation digitisation is the name of the game – Chemical companies must invest in digitisation to achieve both long- and short-term benefits, the latter of which includes three business dimensions: customer facing, organisational and operations. In operations, applying digital technologies to activities such as maintenance has already improved network and plant performance, minimised downtime, and reduced operating costs up to 10%. However, greater savings can be achieved by using digitisation to integrate manufacturing and business systems, redesign processes, and optimise production. Chemical companies have been unable to successfully shift from ‘product seller’ to ‘solution provider’ for a long time, especially in customer-facing aspects. Digitisation can bring about a sea change here. For example – in paper chemicals, suppliers can use sensors to track how products are integrated into a customer’s operations. This enables chemical companies to improve their products based on utilisation trends and this also improves their ability to address customer needs proactively. Lastly, machine learning allows companies to do more with fewer people and thereby lowers the cost of conducting business. AI can potentially reduce organisational layers by replacing traditional management hierarchy centralised spans with localised control.

Portfolio coherence is required – Faced with sagging profitability and drooping demand, chemical companies tried to opt for inorganic growth through mergers and acquisitions (M&A). They hoped to purchase products that perfectly complemented their existing line-up and allowed them to enter lucrative fields that aligned with their strategic goals. In the previous year, big business deals were announced, including major ones such as Dow/DuPont and Bayer/Monsanto that are still pending approval. Companies that went in for M&A will need to strike the perfect balance between revenue and cost synergies promised to their shareholders and validate the deal. Companies that adopted a ‘wait and watch’ policy will have to prove that they own coherent, focussed portfolios that they can squeeze the maximum value from. Opting for acquisitions in existing segments may not be the wisest strategy as the market is already highly consolidated. Entering adjacent markets might also be a tricky proposition given limited companies to attack along with the risk of correctly identifying adjacent markets. That is why spinning off certain businesses might be the most profitable and feasible option, particularly because diversified chemical companies suffer conglomerate discounting in the market.

Although the chemical industry has swung like a pendulum from good times to bad, it no longer seems to be able to return to profitable growth riding on an innovative product segment or a new market opening up. It has easily been decades since either of those scenarios have been observed. With strategic steps in the right direction, doors to profitable growth can be opened at the very least. However, companies can scarcely afford to delay and would be advised to strike while the iron is hot.

Shambhu Nath Jha with an experience nearing a decade, has helped over 50 large and medium to small business enterprise to foray into new markets, increase footprint in the existing bucket and understand the nature of the beast. These beasts are the companies that have been primarily engaged in chemicals, material or packaging activities, and encountering challenge either in maintain P&L or staying ahead of their competitors. He has authored over 300 industry research papers consisting critical information such as market growth, total addressable market, serviceable addressable market, market size, forecast, player strategies, market share estimates and winning imperatives along with recommendations. He is also the pioneer of “three slope distributor/off-taker evaluation model” used by several multinational companies to track the performance of channel partners. A consultant by profession, writer by mood and explorer by desire, Shambhu Nath is currently employed with a London based market research and consulting firm as a full time consultant. A few of the industry verticals where he demonstrated his skill includes water and wastewater treatment chemicals, high purity alumina, water purifiers, activated carbon, chloramine filters, bio-based bioplastics, water purifiers, textile chemicals etc.